When Google restructured its operations as Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) it broke off its Other Betting segment from its core Google business. While many investors are familiar with some of those other bets, such as Waymo (autonomous vehicles) and Verily (life sciences), the segment also includes a $7 billion investment fund called CapitalG.
CapitalG is a venture capital fund focused on growth-stage companies. Not only does it give these companies a cash injection in the form of an equity investment, but it also gives them access to Google’s expertise. That can be a huge advantage for a young company, and CapitalG has seen 16 of the companies it has invested in make an initial public offering.
In addition to CapitalG, Alphabet has investments in 43 publicly traded companies, which accounted for approximately $2.5 billion in investments at the end of last quarter, according to SEC filings. And there are two beaten-down publicly traded growth stocks the fund added last quarter that may be worth a closer look.
1. GitLab
Alphabet gave a substantial boost to its interest in GitLab (NASDAQ:GTLB) last quarter, increasing total shares by 269%. It is now by far Alphabet’s largest public holding, valued at approximately $550 million.
GitLab is a code repository management platform similar to Microsoft‘s GitHub. It integrates numerous software development tools and makes it easy to maintain code, track issues, and enforce security to keep all of your company’s code private.
GitLab offers its services to individuals for free, but charges for premium features or business accounts. It has more than 30 million users and 1 million active license users.
The free level is essential to the land-and-expand strategy, which has worked well. The company produced a net dollar-based retention rate of 130% in the fourth quarter, meaning existing customers spent about 30% more on its services last quarter than the year before. The number of customers spending more than $1 million per year increased to 96, a 52% increase year over year. Both helped drive revenue growth of 33% in the fourth quarter.
But management disappointed Wall Street with its guidance for fiscal 2025. The company expects revenue between $725 million and $731 million, resulting in earnings per share of $0.19 to $0.23. These figures fell below analyst expectations and sent the share price lower in March.
The stock valuation is high no matter how you look at it. That makes the stock risky. But with strong sales growth, super-high gross margins and demonstrable operating leverage in the business, profits could grow quickly. Analysts studying the stock expect annual growth of 38% over the next five years. Although it is a somewhat risky investment, you can be in good company with Alphabet if you decide to add it to your portfolio.
2. First medicine
Alphabet is one of the largest external investors in the world First medicine (NASDAQ:PRME), and it increased the number of shares in the company by 27% last quarter. Alphabet’s 15 million shares give it a 12.55% stake in the biotech company.
Prime Medicine focuses on gene editing therapies. The company recently received approval from the FDA to initiate a Phase 1/2 study for the treatment of chronic granulomatous diseases. It has several other treatments in the discovery or lead optimization part of the development pipeline.
As such, Prime Medicine is pre-revenue, and investors are heavily focused on its cash burn rate and balance sheet. After offering additional shares of the stock to the public in February, the company ended the quarter with $210.7 million in cash and equivalents on its balance sheet. It holds another $13.5 million in restricted cash.
Over the last four quarters, cash burn was approximately $200.6 million. Moreover, that number will increase as it ramps up R&D spending on new therapies in the pipeline. Unfortunately, Prime Medicine will in all likelihood burn through its existing cash market before its chronic granulomatous therapy comes to market. That means the country will have to raise cash again, probably through the issuance of new shares, taking into account the current cost of debt.
Prime Medicine could deliver some groundbreaking treatments with its gene editing process, but its finances are very precarious. That makes it a very risky investment that can have many advantages, but just as many disadvantages. Consider your allocation if you choose to follow Alphabet and buy shares around the current price.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy holds positions at Alphabet and Microsoft. The Motley Fool holds positions in and recommends Alphabet, GitLab, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Here are the two growth stocks that Google’s parent company just added to its $7 billion portfolio. Originally published by The Motley Fool
